Philip Whiteley's Blog

June 16, 2017

Austerity doesn’t work – well, who knew?

Filed under: Uncategorized — felipewh @ 10:09 am

Nearly a decade ago, the Thatcherite, neo-liberal financing system came crashing down. It failed even on its own terms. It promised efficient allocation of capital, accurate pricing, encouragement of economic growth and creation of wealth. Instead, it resulted in credit booms and irresponsible speculation, compounded by political corruption.

It was a giddy time, the winter of 2008-09. The scale of corruption by Wall Street became apparent when the US government let Lehman Brothers crash (it didn’t have such close political connections as others), while bailing out its cronies, dumping the entire cost on to the taxpayer. If you committed such a white collar crime on a small scale, you would go to prison; when you do the same on a colossal scale, having captured the political system with lobbying, you get to retire with your riches.

In the UK, the Government also socialized the losses, through its bail-outs and bank nationalizations. The result was a soaring deficit and sharply increased Government debt. It hadn’t helped that Gordon Brown had ignored warnings about rising debt and credit bubbles, especially by Vince Cable, and instead stoked a boom to help Labour win the election in 2005. Here is the Cable and Brown Q&A, from 2003:

Vince Cable: “The growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level. What action will the Chancellor take on the problem of consumer debt?”

Gordon Brown: “The hon. Gentleman has been writing articles in the newspapers … that spread alarm, without substance, about the state of the British economy. … What the Bank of England said yesterday about the prospects for growth …suggests that we have been right about the prospects for growth in the British economy, and the hon. Gentleman has been wrong.” [Hansard 13 November 2003]

In the three General Elections since austerity began, Labour have lost all, by comfortable margins. The core reason for Labour’s failure was a refusal to acknowledge the real reasons for the austerity and claim that there are easy solutions. Labour, and The Guardian, decided to blame austerity on ‘Tory cuts’, making it easy ever since for Conservatives to portray themselves as the sensible grown-ups, a task made easier still by the fact that there was some truth to the narrative that the boom and bust was partly Gordon Brown’s fault (see above). Oliver Letwin had made similar criticisms to Vince Cable in the same debate.

At the Labour conference in 2010, Harriet Harman and Neil Kinnock were positively chortling with glee at the opportunity that the austerity programme and the Liberal Democrats’ decision to join the coalition gave them to hoover up left-leaning Lib Dem voters. Ironically, this was opportunistic, short-termist behaviour – just like the speculators and bankers – seeking a quick profit for the Labour Party, rather than committing to rebalance the economy and generate sustainable growth.

Since then, Labour and The Guardian have blamed ‘Tory cuts’ for austerity, and used a crude Keynesian argument, implying that there’s some short cut out of the crisis through a succession of spending commitments. ‘Austerity,’ they gravely intone, ‘doesn’t work’.

Well, of course, austerity ‘doesn’t work’. Here is a list of other things that don’t work: Broken glass. Car crashes. Plastic waste in the oceans. This tautology, repeated by left-wing commentators for nearly a decade now, rests on a misunderstanding of what austerity is, and a refusal to analyse what caused it. This has culminated in Jeremy Corbyn’s naïve economic policies that could well worsen austerity, if borrowing rises too much and the credit rating is slashed. It’s not inevitable, but Labour’s leadership appear unaware of the risk.

My fear is that a once-in-a-lifetime opportunity has been missed. The left should have challenged dominant neoliberal narratives and the corruption it encouraged, and should make the case for a financial system that serves society, rather than the other way around. Instead, they just offer a long menu of spending commitments in an unreformed system.

Still, with young people being brought into political debates, there is the opportunity to develop a more enlightened manifesto next time around. I’m always the optimist. But the left rapidly has to quit its addiction to quick fixes, analyse what’s really happened and develop much better policies.


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